3-3-11 Solutions

3-3-11 Solutions - Q16-1. Securities such as convertible...

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Unformatted text preview: Q16-1. Securities such as convertible debt or stock options are dilutive because their features indicate that the holders of the securities can become common shareholders. When the common shares are issued, there will be a reduction dilutionin earnings per share. Q16-2. Corporations issue convertible securities for two reasons. One is to raise equity capital without giving up more ownership control than necessary. A second reason is to obtain financing at cheaper rates. The conversion privilege attracts investors willing to accept a lower interest rate than on a straight debt issue. Q16-3. Convertible debt and debt issued with stock warrants are similar in that: (1) both allow the issuer to issue debt at a lower interest cost than would generally be available for straight debt; (2) both allow the holders to purchase the issuers stock at less than market value if the stock appreciates sufficiently in the future; (3) both provide the holder the protection of a debt security if the value of the stock does not appreciate; and (4) both are complex securities which contain elements of debt and equity at the time of issue. Convertible debt and debt with stock warrants are different in that: (1) if the market price of the stock increases sufficiently, the issuer can force conversion of convertible debt into common stock by calling the issue for redemption, but the issuer cannot force exercise of the warrants; (2) convertible debt may be essentially equity capital, whereas debt with stock warrants is debt with the additional right to acquire equity; and (3) the conversion option and the convertible debt are inseparable and, in the absence of separate transferability, do not have separate values established in the market; whereas debt with detachable stock warrants can be separated into debt and the right to purchase stock, each having separate values established by the transactions in the market. BR IEF EXERCISE 16-1 Cash.............................................................................................. 3,960,000 Discount on Bonds Payable.................................................... 40,000 Bonds Payable.................................................................. 4,000,000 BR IEF EXERCISE 16-2 Bonds Payable........................................................................... 2,000,000 Discount on Bonds Payable.............................................
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3-3-11 Solutions - Q16-1. Securities such as convertible...

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